The German Ministry of Finance issued on 15 April 2010 a Tax
Circular ("Tax Circular") clarifying the tax reporting
obligations of German investors holding shares or similar interests
in non-German partnerships and in other (corporate) entities.
Under German law, a German tax resident acquiring an interest or
increasing an existing interest or shareholding in a non-German
partnership or other (corporate) entity is obliged to notify the
German tax authorities within one month of the acquisition or
increase of an existing interest or shareholding in any such entity
(subject to some de minimis exemptions). Such reporting
obligations also apply to investments in non-German fund vehicles
organised in such a legal structure. It will therefore be of
relevance, for example, to US or offshore hedge funds, private
equity funds or any other private fund organised as a partnership,
corporation or similar entity (e.g., as a trust). The Tax Circular
states that such tax reporting obligations may also be fulfilled by
such non-German entity. If such non- German entity, however, does
not itself fulfill such tax reporting obligations, as a default
provision, they will be deemed to be vested with the German tax
If such tax reporting obligation is not complied with, it may
lead to a penalty charge by the German authorities.
From a practical perspective, this new Tax Circular may be of
relevance to non-German private funds that should either (i)
include in their fund documents an obligation at the investor level
to comply with such tax reporting obligations, or (ii) include in
the subscription documents a representation by their (German tax
resident) investors that they comply with such tax reporting
In this context, the Tax Circular also confirmed the prevailing
view among German tax practitioners that any non-German partnership
with two or more German tax resident investors has to report and
file with the German tax authorities a partnership tax return in
accordance with German tax law. In practice, for example, US
Schedule K-1's are used as a basis to report and file German
partnership tax returns. In subscription documents (including side
letters) with German tax resident investors, the scope and costs of
such tax returns are typically negotiated.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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